Jumpline magazine February 2025 - Flipbook - Page 8
8
Financial Alternatives
Mark Buckley, MDFR Ret.
Strategies for Your 457 Plan
The 457 plans
offered to us at
MDFR by Nationwide and Mission
Retirement are great retirement saving
tools, particularly because they offer
tax-deferred growth, relatively high contribution limits, and 昀氀exible withdrawals.
We, as 昀椀rst responders, enjoy even more
advantages than that of the general population. For those looking to maximize
retirement savings while minimizing the tax burden, a 457 plan
can be an excellent choice, especially when combined with other
retirement accounts like an IRA or 401(k).
In previous Jumpline articles I’ve explained what a 457 plan is.
In this edition, I’ll go into greater detail.
Maximize Your 457 Plan’s Growth: The Power of Index Funds
and Lower Fees
Billionaire investor Warren Buffet once stated, “When trillions of
dollars are managed by Wall Streeters charging high fees, it will
usually be the managers who reap outsized pro昀椀ts, not the clients. Both large and small investors should stick with low-cost
index funds.”
When planning for retirement, one of the most effective ways to
ensure long-term growth of your investments is by taking advantage of low-cost, diversi昀椀ed options. If you’re enrolled in the 457
plans offered to MDFR employees by Nationwide and Mission
Retirement, one of the best ways to achieve this is by investing
in index funds. These funds offer a simple, cost-effective way to
grow your savings over time. Let’s explore why index funds are
an excellent choice for your 457 plan, focusing on their potential
for growth and the impact of minimizing fees.
1. THE POWER OF INDEX FUNDS
Index funds are mutual funds or Exchange-Traded Funds (ETFs)
that aim to replicate the performance of a speci昀椀c market index,
like the S&P 500 or the Russell 2000. These funds invest in all
(or a representative sample) of the stocks that make up the index, offering broad market exposure. There are several advantages to choosing index funds for your 457 plan:
Diversi昀椀cation: By investing in an index fund, you’re automatically spreading your money across a wide variety of companies within a sector or the entire market. This reduces
the risk of putting all your money into a single stock or sector. For example, an S&P 500 index fund gives you exposure to 500 large U.S. companies, helping to mitigate the risk
that any one stock’s performance could derail your portfolio.
Consistency: Since index funds track a speci昀椀c index, they
offer steady, predictable performance in line with the overall
market. While individual stocks can be volatile, index funds
typically offer more stability and long-term growth potential.
Long-Term Growth: Historically, the stock market has delivered
solid long-term returns, averaging around 7-10% annually, after
in昀氀ation. By investing in index funds, you align your 457 plan
with this broad market growth, giving you a good chance of earn-
ing consistent returns over time.
2. REDUCING FEES – A KEY TO
MAXIMIZING RETURNS
One of the biggest factors that can erode
your investment returns over time is high
fees. Actively managed funds often come
with higher management fees because
they require more frequent trading and
research. In contrast, index funds are
passively managed, which means they
aim to match the performance of an index rather than beat it.
This results in lower fees.
Lower Management Fees: Index funds typically charge signi昀椀cantly lower expense ratios compared to actively managed funds. While actively managed funds might have fees
upwards of 1% or more per year, index funds often charge
0.05% to 0.20%. Over decades, these small savings can
add up to thousands of dollars in additional returns, allowing you to keep more of your money working for you.
Compounding Returns: Lower fees mean that more of your investment can remain invested, compounding over time. A small
reduction in fees may not seem like much in the short term, but
the long-term impact of keeping more of your returns is substantial. For example, paying 1% less in fees could mean a difference of tens of thousands of dollars by the time you retire.
No Need to ‘Beat the Market’: Active fund managers charge
higher fees because they are attempting to outperform the market. However, research has shown that the majority of active
managers fail to consistently beat the market over the long term.
By investing in passively invested index funds, you’re not trying
to outsmart the market; you’re ensuring that you bene昀椀t from the
market’s overall growth, while minimizing costs.
3. HOW INDEX FUNDS HELP YOU BUILD WEALTH
IN A 457 PLAN
A 457 plan is a tax-advantaged retirement savings account,
which means you can defer taxes on your contributions and
investment gains until you withdraw the money, usually during
retirement. This tax deferral is especially valuable over long periods, as it allows your investments to grow without being diminished by annual taxes. Index funds are an excellent match
for this structure because they tend to generate fewer taxable
events, especially in the case of capital gains, compared to actively managed funds.
By investing in a well-diversi昀椀ed portfolio of index funds within
your 457 plan, you set yourself up for growth while minimizing
fees and taxes, which can lead to a larger nest egg when it’s
time to retire.
4. CHOOSING THE RIGHT INDEX FUNDS FOR
YOUR 457 PLAN
When selecting index funds for your 457 plan, consider the following:
Asset Allocation: A well-balanced portfolio typically includes
a mix of U.S. stocks, international stocks, and bonds. You can
March 2025 | JUMPLINE Magazine
